Designer Brands Inc. — Form 10-K Summary
Reporting period: Fiscal year 2021, the 52 weeks ended January 29, 2022—not 2020 Q4. The filing compares fiscal 2021 with fiscal 2020, which ended January 30, 2021. Amounts are U.S. dollars.
Business context
Designer Brands operates U.S. Retail (DSW), Canada Retail (The Shoe Company and DSW), and Brand Portfolio (wholesale, First Cost commissions, and Vince Camuto e-commerce). At year-end, it operated 648 stores, versus 663 a year earlier. Management emphasized customer experience, growing owned brands, and faster fulfillment. It described fiscal 2021 as a recovery year following pandemic-related closures and disruption.
Financial results and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $3.197 billion | $2.235 billion |
| Gross profit / gross margin | $1.069 billion / 33.4% | $311.2 million / 13.9% |
| Operating profit (loss) | $205.2 million / 6.4% of sales | $(586.3) million |
| Net income (loss) | $154.5 million | $(488.7) million |
| Diluted earnings (loss) per share | $2.00 | $(6.77) |
| Cash from (used in) operating activities | $171.4 million | $(153.8) million |
| Cash used in investing activities | $35.0 million | Cash provided: $2.6 million |
| Cash from (used in) financing activities | $(121.5) million | $123.0 million |
- Sales rose 43.0% year over year; comparable sales increased 51.6% overall (U.S. Retail +55.0%, Canada Retail +20.1%). The recovery reflected 2020 store closures and depressed traffic. Consolidated sales remained below fiscal 2019 levels.
- Gross margin was 33.4%, versus 28.6% in fiscal 2019. Management attributed the improvement to sales recovery, tight inventories, and fewer promotions. Operating expenses were 27.2% of sales, down from 33.7% in 2020 but above 25.1% in 2019.
- Fiscal 2021 net income included $23.2 million of net after-tax benefits, or $0.30 per diluted share, primarily related to deferred-tax valuation allowance changes, restructuring charges, and target acquisition costs. Fiscal 2020 net loss included $207.1 million of net after-tax charges, or $2.87 per share, primarily involving impairments, restructuring, a vendor settlement gain, and deferred taxes.
- At January 29, 2022, cash and cash equivalents were $72.7 million; cash, cash equivalents, and restricted cash totaled $74.5 million. Current assets were $914.2 million and current liabilities $758.9 million. Inventory was $586.4 million.
- Year-end debt was $231.3 million, all under the Term Loan; the $400 million ABL Revolver had no borrowings and $395.1 million available after letters of credit. The company reported compliance with financial covenants. On February 8, 2022, it repaid the Term Loan using ABL borrowings; afterward, ABL borrowings were $235.0 million with $160.1 million available. The payoff generated a $12.7 million loss on extinguishment to be recorded in Q1 2022.
- Operating lease liabilities totaled $795.7 million. Fiscal 2021 capital expenditures were $33.0 million. Management expected fiscal 2022 capital expenditures of approximately $70–80 million.
Material changes and management outlook
- Retail comparable sales rebounded sharply from 2020, while Brand Portfolio sales increased 15.0% to $286.0 million including intersegment sales; that segment remained below pre-pandemic sales levels. Four Brand Portfolio customers accounted for approximately 57% of its external segment sales.
- Fiscal 2020 impairment charges totaled $153.6 million, including store, customer-relationship intangible, and First Cost reporting-unit impairments. Fiscal 2021 impairment charges were $1.7 million.
- Management said operating profit in 2021 exceeded pre-COVID-19 2019 levels by 61%. It highlighted growth in athletic, men’s, and kids’ categories, alongside continued strength in seasonal and dress footwear.
- Management did not provide a full-year earnings or sales forecast in the supplied filing text. It targeted reducing digital-order fulfillment from five to seven business days to two to three calendar days, while controlling costs, and said it believed cash generation, cash on hand, and revolver availability supported operations and capital spending over the next 12 months and beyond.
Risks, contingencies, and other notable items
- Risks include continued COVID-19 effects, inflation and freight costs, supply-chain disruption, changes in discretionary spending and fashion preferences, labor availability, and competition. The company reported that Nike stopped shipping to it during Q3 2021; it was seeking replacement assortment through exclusive brands, Brand Portfolio products, and other vendors.
- Brand Portfolio merchandise is sourced entirely from third-party facilities outside the U.S.; 75% of units came from China in 2021. Three third-party vendors supplied about 20% of retail merchandise.
- The ABL Revolver includes a minimum-availability covenant and restrictions on dividends, repurchases, and certain other actions. The filing also describes material minimum royalty commitments and substantial lease obligations.
- Deferred tax assets remained subject to a $70.8 million valuation allowance at year-end. The company reported $11.1 million in gross unrecognized tax benefits.
- Legal proceedings were described as ordinary-course matters, with potential liability not expected to be material. The auditor gave unqualified opinions on the financial statements and internal control; inventory markdown valuation was identified as a critical audit matter.
- Schottenstein Affiliates held approximately 54% of voting power. The company also leases its fulfillment center from a related party; that lease was due to expire in September 2022, with two five-year renewal options.
Key facts investors should verify
- Whether sales, margins, and operating profit remain above pre-pandemic levels as customer traffic, promotions, and supply conditions normalize.
- Whether the company can offset the loss of Nike product with alternative brands and manage inventory without increased markdowns.
- Post-February 2022 ABL borrowing levels, availability, interest costs, and covenant headroom following the Term Loan repayment.
- How the $70–80 million fiscal 2022 capital-spending plan and sizable lease and royalty commitments affect cash generation.
- Whether Brand Portfolio customer concentration, China sourcing exposure, and the deferred-tax valuation allowance change materially.